Less-than-expected increase is smallest since last fall

WASHINGTON (MarketWatch) — The economy in March added the fewest number of jobs in five months, breaking a string of strong employment gains and raising questions about the strength of the U.S. recovery.

The U.S. generated 120,000 jobs last month — well below expectations. Economists surveyed by MarketWatch expected an increase of 210,000, seasonally adjusted.

Hiring also failed to top the 200,000 mark for the first time since November.

Some economists had cautioned that jobs gains in March could end up lower because of unseasonably warm winter weather. Companies kept workers on or hired people in January and February who otherwise would have been added in March or April.

These changes in hiring patterns may not have been fully captured by the government’s efforts to adjust for seasonal factors.

The March report also contained other signs of weakness. While the unemployment rate fell to 8.2%, the lowest level since January 2009, the decline stemmed entirely from people dropping out of the labor force. It’s the first time that’s happened this year.

That’s usually a negative sign because it suggests jobs have become somewhat harder to find. Yet a raft of other economic data indicate that more companies plan to hire, so a decline in the labor force in March could be a temporary blip. The labor force had risen by almost 1 million in the first two months of 2012.

In another break with recent trends, job growth in prior months was not revised sharply higher. The economy added just 4,000 additional jobs in January and February than initially reported, according to the Labor Department’s revised figures.

The latest employment data interrupts a string of economic reports showing the U.S. on an upswing after several years of lackluster growth following the end of the 2008-2009 recession.

“The number was much weaker than expected, but does this represent a shift in the trend? That’s unclear,” said Michael Gapen, an economist at Barclays Capital.

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The report caused tremors in Washington, too. Both political parties are watching the employment data closely as the November presidential election nears.

The Obama administration argues it has set the stage for an economic rebound, while Republicans blame the White House for the slow recovery. Read about reaction to jobs report.

Inside the report

While hiring did slow in March, most sectors of the economy padded payrolls.

The biggest increase took place among manufacturers, which tend to pay higher wages. They added 37,000 employees in March and have created nearly half-a-million jobs over the past two years.

Bars and restaurants added 37,000 jobs, while professional and business services hired 31,000 workers. On a negative note, temporary hiring in the services sector fell slightly. Companies usually hired temps before adding fulltime employees.

The only sector to show a sharp drop in employment was the retail sector. Some 34,000 jobs were eliminated. Governments also cut jobs, but only by 1,000.

Rising employment hasn’t given workers much leverage with their bosses, however. Average hourly earnings rose by 5 cents, or 0.2%, to $23.39. Hourly pay is only up 2.1% over the past year, and most of the gain has been eaten up by inflation.

Part of the reason wages haven’t risen quickly is because many of the jobs created over the past few years have been in lower-paying fields. Yet the recent uptick in hiring has been more widespread, producing a greater number of highly paid positions in areas such as manufacturing and management.

The improved rate of hiring is slowly pulling the unemployment rate down. It’s fallen 1.8 percentage points since touching a 29-year high of 10.0% in late 2011.

Even with the latest increase in hiring, however, the private sector still employs 4.8 million fewer people than it did before the last recession started. All those jobs lost won’t be recovered for another three years at the current pace of hiring.

What’s more, the U.S. unemployment rate is still twice as high compared to the last month prior to the recession. About 5.3 million Americans have been out of work for at least six months and a total of 12.7 million are officially classified as unemployed.

When discouraged jobseekers and those who can only find part-time work are included, the unemployment rate was 14.5% in March. Yet the so-called U6 rate has also fallen rapidly over the past year.

Despite the disappointing March jobs report, most economists still believe the U.S. expansion will proceed, with growth accelerating in the second half of the year. The spate of hiring since last fall has put more money in the hands of consumers, whose spending accounts for 70% of economic growth.

“Businesses have been worried about the recovery, but as sales increase, they will be forced to hire more people to handle the demand,” said Bob Baur, chief global economist at Principal Global Investors.

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